The pound to euro graph and the pound to US dollar graph have been heading in opposite directions for most of the past two months, but they’re united in heading upwards this morning as higher than expected UK inflation strengthens sterling.
The result is GBP/EUR at its highest rate since early April. It’s worth pointing out however, that April’s spike was something of an anomaly and the pound has not been this strong consistently for at least a year and arguably since before the referendum five years ago.
It’s now 5-7% stronger than the last five summers.
Despite the decline in recent weeks, GBP/USD remains even stronger, 10 to 12% stronger than last summer.
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To explain the reasons behind the rise a little more, inflation data released this morning hit 2.5% year-on-year to June, up from 2.1% last month.
The Bank of England has warned that it expects inflation to rise to 3% by the end of the year, while in the US it is already at 5.4%, as reported yesterday afternoon.
Anyone under the age of 50 might need to ask an elderly relative about really high inflation – it reached 24% in 1975 and 9.5% in 1990.
The difference is that in 1975 the Bank of England interest rate was 11% and in 1990 it was 14%, whereas today it is 0.1%.
There is reason to believe, therefore, that the Bank of England might raise interest rates in an attempt to cool the economy down, and it is the promise of that which has strengthened sterling.
